Product mix decision The Jackson Company has one machine on

Product mix decision. The Jackson Company has one machine on which it can produce either of two products, Y or Z. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Jackson can sell all output at current prices. Product Y requires one hour of machine time per unit of output and Product Z requires two hours of machine time per unit of output. The following information summarizes the per-unit cash inflows and costs of Products Y and Z.

Product Y (per unit)

Product Z (per unit)

Selling Price

$30

$55

Materials

$ 4

$ 6

Labor

1

3

Allocated Portion of Fixed Costs

14

26

Total Cost per Unit

$19

$35

Gross Margin per Unit

$11

$20

Selling costs are the same whether Jackson produces Product Y or Z, or both; you may ignore them.

Required:

Should Jackson Company plan to produce Product Y, Product Z, or some mixture of both? Why?

	Product Y (per unit)	Product Z (per unit)
Selling Price	$30	$55
Materials	$ 4	$ 6
Labor	1	3
Allocated Portion of Fixed Costs	14	26
Total Cost per Unit	$19	$35
Gross Margin per Unit	$11	$20

Solution

JACKSON COMPANY PRODUCT COST & MARGIN MATRIX: Product Y (per unit) Product Z (per unit) Selling Price $30.00 $55.00 Materials $4.00 $6.00 Labor $1.00 $3.00 Allocated Portion of Fixed Costs $14.00 $26.00 Total Cost per Unit $19.00 $35.00 Gross Margin per Unit $11.00 $20.00 a) ASSUMING MACHINE RUNNING FOR 24 HOURS FOR SINGLE PRODUCT: COST & BENEFITS SHALL BE AS FOLLOWS: Product Y Product Z Units produced (Y = 1 per hour, Z =1 per two hours) 24.00 12.00 Sales Revenue $720.00 $660.00 Materials $96.00 $72.00 Labor $24.00 $36.00 Allocated Portion of Fixed Costs $336.00 $312.00 Total Cost $456.00 $420.00 Gross Margin $264.00 $240.00 From above, it is concluded that if Jackson Company produces Product Y it will earn $264/- in 24 hours but if it produces Product Z, it will earn only $240/-. Therefore, production of Product is more beneficial. b) ASSUMING MACHINE RUNNING FOR 12 HOURS FOR EACH PRODUCT: FOR PRODUCT MIX: COST & BENEFITS SHALL BE AS FOLLOWS: Product Y Product Z Total Units produced (Y = 1 per hours, Z =1 per two hours) 12.00 6.00 18.00 Sales Revenue $360.00 $330.00 $690.00 Materials $48.00 $36.00 $84.00 Labor $12.00 $18.00 $30.00 Allocated Portion of Fixed Costs $168.00 $156.00 $324.00 Total Cost $228.00 $210.00 $438.00 Gross Margin $132.00 $120.00 $252.00 From above, it is clear that when machine is used 50% for each product, Jackson Company will earn $252/-. Therefore, production of Product Y is more beneficial in all three option i.e. Product Y 100%, Product Z 100% or both 50% each. Benefit summary is as follows Ratio Benefit RANK 1. Product Y 100% $264.00 1 2. Product Z 100% $240.00 3 3. Product Y & Z 50% each $252.00 2 Therefore product Y is most beneficial. In other words, since product Y earns more per hour, hence it is beneficial